JP Morgan: MGM Stock Volatility Could Increase Post-Caesars Takeover

• Analysts warn that an acquired Caesars would concentrate capital and heighten trading volatility for rival MGM
• A successful buyout would eliminate one of the few pure-play public options left for investing in Las Vegas Strip real estate
• The rumored premium being offered for Caesars strongly implies that both MGM and Penn are significantly undervalued by the market

If Caesars Entertainment (NASDAQ: CZR) is acquired and taken private, that could lead to increased volatility for MGM Resorts International (NYSE: MGM) stock, according to analysts for global investment firm JP Morgan.

According to JPMorgan analyst Daniel Politzer, a private buyout of Caesars by Tilman Fertitta would leave Wall Street with a stark shortage of publicly traded vehicles for targeting the Las Vegas Strip.

Further, one fewer publicly traded LV Strip resort operator could result in MGM becoming increasingly volatile, as public equity investors will have one fewer proxy to express their Las Vegas Strip views,” observes the analyst.

MGM and Caesars are the two largest Strip operators. Other publicly traded Strip operators include Apollo Global Management (NYSE: APO), which runs the Venetian, and Wynn Resorts (NASDAQ: WYNN).

However, Apollo is a massive private equity company with an array of business interests while Wynn generates the bulk of its earnings before interest, taxes, depreciation and amortization (EBITDA) and revenue in Macau.

Good News for MGM Stock in a Caesars Takeover

In the event that Caesars is sold in a private transaction, there is some good news for MGM stock. According to Politzer, Fertitta’s rumored offer in the low $30s per share values Caesars at a 15% free cash flow (FCF) yield and an enterprise value of seven times EBITDAR.

There may be a silver lining for Penn Entertainment (NASDAQ: PENN), too. Based on the rumored takeover value of Caesars, Penn could be worth $25 to $30 a share, according to Politzer. The midpoint of that range, $27.50, implies significant upside from last Friday’s closing price of $16.20.

Penn is the largest operator of regional casinos, thus making for relevant comparisons with Caesars, which has an expansive regional portfolio of its own.

Speaking of Regional Casinos…

Assuming Fertitta is victorious in his quest for Caesars, the combined company will likely unload some assets in multiple markets, including Las Vegas, because Caesars and the buyer’s Golden Nugget overlap in several jurisdictions.

Some asset sales could be voluntary while others could be forced by state regulators, but for prospective buyers of regional gaming assets, the post-Caesars deal period could be an interesting time.

“For any regional gaming acquirer, the potential for forced divestitures could provide attractive acquisition opportunities,” concludes Politzer.